Partnership returns, 2002

Statistics of Income Bulletin, Fall, 2004 by Tim Wheeler, Maureen Parsons

A partnership is an unincorporated organization formed by two or more entities or persons that join to carry on a trade or business. Each partner contributes money, property, labor, or skill, and each expects to share in the profits and losses. Every partnership that engages in a trade or business or has income from sources in the United States must file an annual information return, Form 1065, U.S. Partnership Return of Income, or Form 1065-B, U.S. Return of Income for Electing Large Partnerships, with the Internal Revenue Service. Most of the partnerships included in this study filed a 2002 Form 1065. A partnership does not pay tax on its income but "passes through" any profits and losses to its partners, who must include those profits and losses on their tax returns. The following are highlights from the 2002 partnership study:

[] For 2002, the number of partnerships increased 5.2 percent, from 2,132,117 for 2001 to 2,242,169 for 2002 [1]. Since 1994, the number of partnerships has increased at an average annual rate of 4.8 percent. Prior to 1994, the number of partnerships declined for 5 consecutive years (Figures A and B).

[] The number of partners increased by 0.7 percent, from 14,231,604 for 2001 to 14,328,108 for 2002 (Figures A and B). This marked the second year of increase, following 3 consecutive years of decline.

[] Total partnership net income (less deficit) decreased by 2.1 percent, from $276.3 billion for 2001 to $270.7 billion for 2002 (Figures A and C). The largest decreases occurred in the finance and insurance sector and the real estate and rental and leasing sector, $10.4 billion and $4.0 billion, respectively (Figure D). The largest increases occurred in the professional, scientific, and technical services sector and the information sector, $4.5 billion and $4.4 billion, respectively. The largest decrease of components for total partnership net income (less deficit) was reported by portfolio interest income, which decreased $14.6 billion. The largest increase was for net income (less deficit) from a trade or business, which increased $12.0 billion (Figure C and Table 1). (See the "Explanation of Selected Terms" section for the definition of Total net income (less deficit).)

[] Total receipts from operations and investments increased 2.6 percent, from $2.9 trillion for 2001 to $3.0 trillion in 2002 (Figure D). (See the "Explanation of Selected Terms" section for the definition of total receipts.) The manufacturing sector reported the largest total receipts of any sector, $503.8 billion, followed by finance and insurance, which reported $418.8 billion (Figure E). Business receipts, the largest component of total receipts, increased 6.3 percent from $2.3 trillion for 2001 to $2.4 trillion for 2002. (See the "Explanation of Selected Terms" section for the definition of business receipts.)

[] Total assets of partnerships reporting balance sheets increased 5.2 percent, from $8.4 trillion for 2001 to $8.9 trillion for 2002 (Figure D). The finance and insurance sector reported 49.4 percent of the total assets for all partnerships, followed by the real estate and rental and leasing sector, which reported 25.2 percent (Figure F). However, 25.0 percent of all partnerships--generally those with total assets of less than $600,000 and total receipts of less than $250,000--were not required to file a balance sheet with their returns [2]. For those that did file balance sheets, Table 3 presents these data, by industry and by profit status.

[] All sectors except for the information sector, education services sector, arts, entertainment, and recreation sector, and accommodation and food services sector reported positive income (less deficit) allocated to partners (Table 5). The largest amounts of income were once again allocated to general and limited partners who were individuals, $71.7 billion and $60.3 billion, respectively.

[] When comparing partnership 2002 data to 2001 data, the impact of the September 11, 2001, terrorist attack needs to be taken into account. Although terrorist attack returns had Tax Year 2000 accounting periods, they were often included in the 2001 statistics because of their late filing. (See the "September 11, 2001, Terrorist Attack Returns" section for more information on comparing 2002 data to 2001 data.)

Allocations to Partners

Partnerships are not taxed directly. Instead, their income, credits, and deductions flow through to the partners for inclusion on the partners' own tax returns. Partners may be individuals, corporations, other partnerships, tax-exempt organizations, nominees, or other legal entities. Table 5 presents data showing the different types of partnership income (or losses) and deductions allocated to partners for selected industry groups. These data were obtained from Schedule K, Partners' Shares of Income, Credits, Deductions, etc., of the partnership return, which reports each component in total and by type of partner.

For 2002, all partnerships reported a total of $389.9 billion for total income (less deficit) available for allocation, before deductions (Table 5). For separately stated deductions (such as charitable contributions and investment interest expense), all partnerships reported a total of $97.0 billion. The difference between total income (less deficit) and total deductions resulted in $292.9 billion of income (less loss) available for allocation to partners. Of this amount, 98.4 percent was identified as allocated by type of partner. The difference between the amount allocated and the amount available to allocation was due to some partnerships failing to report allocations, by type of partner, on their returns as originally filed.